U.S. Manufacturing Shrinks to Three-Year Low

U.S. manufacturing shrank in June for the first time in nearly three years, a troubling sign as evidence builds that economic growth is slowing.

The Institute for Supply Management, a trade group of purchasing managers, said Monday that its index of manufacturing activity fell to 49.7. That’s down from 53.5 in May and the lowest reading since July 2009, after the recession officially ended. Readings below 50 indicate contraction. Click here to read the industry report.

Production fell to a three-year low and a measure of new orders plummeted by the most in more than a decade, suggesting the weakness will likely persist in the coming months.

Stocks, which had largely been flat when the market opened, fell immediately after the report was released at 10 a.m. The Dow Jones industrial average dropped more than 70 points in morning trading, The Associated Press reported.

“This is not good. Not good at all,” said Dan Greenhaus, chief economic strategist at BTIG, an institutional brokerage. While the report “does not mean recession for the broader economy, it is still a terribly weak number.”

Manufacturing, which has helped drive growth since the Great Recession ended, has begun to falter as the U.S. job market has fizzled and global growth has weakened.

Americans have pulled back on spending, which has lowered demand for factory-made goods. Europe’s economy is likely in recession, which has hurt U.S. exports. And China’s manufacturing sector grew in June at its slowest pace in seven months, according to a survey released Sunday by the state-affiliated China Federation of Logistics and Purchasing

The sharp drop in U.S. factory activity overshadowed more positive news on the housing market. U.S. construction spending rose for the second straight month, although spending remains well below healthy levels.

Manufacturing is likely to stay weak for the next few months. The ISM’s gauge of new orders, a good measure of future activity, plunged from 60.1 to 47.8. That’s the first time it has fallen below 50 since April 2009, when the economy was still in recession.

Fewer new orders reflect growing concerns of businesses. Many are worried about growth slowing from the anemic 1.9% annual pace in the January-March quarter. Europe’s financial crisis and the prospect that U.S. lawmakers won’t extend a package of tax cuts at the end of the year have added to the uncertain outlook.